Consider the Following Information for Three Stocks, A, B, and C

question 23

Multiple Choice

Consider the following information for three stocks, A, B, and C. The stocks' returns are positively but not perfectly positively correlated with one another, i.e., the correlations are all between 0 and 1. $\begin{array}{cccc}&\text { Expected }&\text { Standard }&\\\text { Stock }&\text { Return }& \text { Deviation } & \text { Beta } \\A&10 \% &20\%& 1.0 \\B&10 \% & 10 \% & 1.0 \\C&10 \% & 12 \% &1.4\end{array}$
Portfolio AB has half of its funds invested in Stock A and half in Stock B. Portfolio ABC has one third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium, so required returns equal expected returns. Which of the following statements is CORRECTσ

• A) portfolio ab's coefficient of variation is greater than 2.0.
• B) portfolio ab's required return is greater than the required return on stock a.
• C) portfolio abc's expected return is 10.66667%.
• D) portfolio abc has a standard deviation of 20%.
• E) portfolio ab has a standard deviation of 20%.

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Definitions:

Information Processing

The act or process of receiving, categorizing, storing, and interpreting data by human or machine systems.

Intuitive Thinking

A cognitive process that involves making decisions or coming to conclusions based on what feels right or what seems to be the most natural choice without explicit reasoning.

Systematic Thinking

A method of thinking that approaches problems with a consistent and orderly framework, focusing on understanding the relationships between parts within a system.

Problems

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